ARTICLES

Dividends

Investors know that the return on a share is made up of a capital gain plus the dividend. Private investors are mostly attracted to the prospect of making a capital gain on the shares which they buy and do not often consider the dividends. What they perhaps do not realise is that a capital gain is actually just the dividend in a different form.

If you assume that a high-quality listed company is going to be in business more or less indefinitely, then the only financial benefit that anyone will derive from owning its shares is whatever dividends it declares. So, if you can sell your shares for more than you paid for them and make a capital gain, it is because the person who buys them from you has a higher perception of the future dividends to accrue to that share than you had when you bought them. Ergo – the capital gain arises from a shift in the perception of the company’s dividends.

People interested in a share are constantly adjusting their perception of the future flow of dividends in response to news about the company and their analysis of its prospects. For example, if it is a gold mine and the gold price drops by $10 an ounce, they will adjust their perception of the value of that share down – and the price in the market will fall as a result.

All of this assumes that the company is a going concern that will continue to trade for many years into the future. If, however, the company is being wound up, it will normally sell all its income-producing assets and then distribute the proceeds to its shareholders after all creditors have been paid out. In such a case you can expect the company to become a cash shell and then declare a series of special dividends.

Last week I had a panicky message from one of our clients who had bought Trencor shares after they were added to the Winning Shares List (WSL) on the 14^th of November 2024 at 755c. He was panicking because on Wednesday last week (19-2-25) the share dropped 88% from 834c to 97c. Of course, it had smashed through his stop-loss level before he had time to sell it. Consider the chart of the share up until last Tuesday’s close:

The client’s mistake was that he had failed to read the Stock Exchange News Service (SENS) messages for the share. As far back as its financials for the year to the 31^st of December 2023 (published on 25-3-24) the company had disclosed that:

“...the group is now invested solely in cash and other liquid assets”, and that,

“Our business strategy remains to distribute the group’s remaining cash resources to shareholders.”

That distribution finally began to happen when they declared a dividend of 730c per share to be paid to shareholders holding the shares at the close of trade on Tuesday the 18^th of February 2025.

Obviously, when the share went ex div on Wednesday (i.e. the next day), the share price dropped to reflect that enormous payout. The share still has some value and there will probably be more smaller distributions as the company’s affairs are finalised.

So, the company was a cash shell with no active businesses, but still trading on the JSE. We added it to the WSL because we assessed that its cash was worth more than the share was trading for back in mid-November last year. We were correct, but the return at this stage consists of the 730c dividend plus the current share price of 97c – less the price when we added it to the list of 755c. In other words, an uninspiring 9,5% over 3 months.   

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